Articles and news about FHA loans and HUD requirements. FHA loans are great for first-time homebuyers.

Monthly Archives: January 2013

FHA Loan Rules For Income: Interest, Trusts, and Dividend Payments

FHA Loan income Rules

Part of the FHA loan approval process involves the lender verifying an applicants income. FHA rules state that for purposes of calculating a borrower’s debt-to-income ratio, only verifiable income can be counted in that ratio.

Do FHA rules allow a borrower’s interest or dividend payments from investments to be counted as verifiable income? For some borrowers this can be an important question. According to HUD 4155.1 Chapter Four, “Interest and dividend income may be used for qualifying as long as tax returns or account statements support a two-year receipt history. This income must be averaged over two years.”

Additional instructions to the lender for this issue include the requirement that when making the calculation, “The underwriter should subtract any funds derived from these sources that are required for the cash investment, before calculating the projected interest or dividend income.”

The FHA also spells out the rules for income from trusts, which “may be used for qualifying if guaranteed, constant payments will continue for at least the first three years of the mortgage term.”

What documentation requirement does the FHA specify for this type of income? According to Chapter Four:

“Required trust income documentation includes a copy of the Trust Agreement or other trustee statement, confirming the

–amount of the trust
–frequency of distribution, and duration of payments.

The borrower may withdraw funds from the trust account to use for the required cash investment if he/she provides adequate documentation that this withdrawal will not negatively affect the amount of trust income the underwriter used to determine repayment ability.”

Another type of income addressed in these rules is described by the FHA as “notes receivable income”. In order to include this as verifiable income, the lender needs the borrower to supply:

  • a copy of the note, to establish the amount and length of payment, and
  • evidence that these payments have been consistently received for the last 12 months, in the form of deposit slips, cancelled checks, or tax returns.

FHA rules in Chapter Four add, “If the borrower is not the original payee on the note, the lender must establish that the borrower is now a holder in due course, and able to enforce the note.” For more information on this type of income, speak to your loan officer or contact the FHA directly.

Do you have questions about FHA home loans or refinance loans? Ask us in the comments section.

 

A Reader Question on FHA Minimum Property Requirements

FHA APPRAISAL QUESTION

A reader asks, “Would a home that is missing just the cabinet doors in the kitchen qualify for FHA? It has the everything else, its just the doors that are missing.”

From time to time we get questions like these that reference specific conditions in a home. Will X make my home ineligible for an FHA mortgage? Does Y disqualify the property? In answering these questions there are two important aspects to consider. One is whether or not a specific condition is described in FHA minimum property standards. Some are, but many more are not.

For example, a home located in certain flood zones may not qualify for an FHA mortgage. A home with standing puddles of water in the basement or a leaky roof may require corrections or repairs before it can be approved for an FHA guaranteed home loan. But there are many more conditions a property may have that require such fixes or corrections that are not described in FHA MPRS. Instead, these issues are covered by state or local building code.

The FHA does not keep copies of all building code requirements on file. The FHA appraiser who works the local area will be familiar with the code requirements for that market and may make judgment calls accordingly.

That’s why for questions like these, the answer is invariably the same–it all depends on the building code in your housing market. We couldn’t speculate whether or not such a situation would pass the appraisal or not except to say that missing cabinet doors is not addressed in the FHA minimum property requirements. However, that does not equal a stamp of approval on the property as such–it needs to pass the required appraisal and that means the home must comply to local or state code.

The best thing to do in such cases is to ask someone knowledgeable in the local area who could say whether or not a certain condition violates code for that area or not. A real estate agent, building inspector, or custom builder may be able to help answer such questions.

Do you have questions about FHA loans or FHA refinance loans? Ask us in the comments section.

New Hampshire Real Estate Agency Settles Housing Discrimination Case

FHA DISCRIMINATION SETTLEMENTThose viewing FHA.gov will find a recent press release by HUD announcing a settlement in a New Hampshire housing discrimination case that many families looking for homes should definitely read. According to the press release HUDNo.13-009, Scott Walker and his company Premiere Real Estate, LLC, in Concord, New Hampshire, have agreed to pay $9,000, “to settle allegations that they refused to rent to families with children in violation of the Fair Housing Act.”

The press release adds, “The days of ‘no children allowed’ are long over,” according to John Trasviña, HUD Assistant Secretary for Fair Housing and Equal Opportunity. “For 25 years, the federal Fair Housing Act has guaranteed families with children the same rights to housing as those without children, and HUD will continue to take swift enforcement action against individuals and housing providers who violate those rights.”

The press release reminds, “The Fair Housing Act prohibits housing discrimination based on familial status, including denying housing to families because they have children under the age of 18.”

What happened in this particular case? “HUD issued a charge of discrimination after a single mother with a 14-year-old child filed a complaint alleging that Walker and Premiere Real Estate refused her request to rent a two-bedroom apartment. The apartment is on the second floor of a two-unit building. Walker uses the first floor unit as his office. HUD’s charge asserted that when the woman inquired about the unit, Walker informed her that families with children didn’t work out in the past because his business is below the rental unit. Walker and Premiere Real Estate allegedly screened applicants and showed available apartments only to persons who did not have children.”

This particular instance involved a rental unit–what relevance does it have for those seeking an FHA mortgage?

Some borrowers experience similar discrimination when seeking home loans; a buyer who refuses to sell, a lender who requires additional evidence of income or other application data that other borrowers aren’t required to furnish, any number of violations of the Fair Housing Act which, as stated above, prevents discrimination based on family status. That includes being married with or without children, being unmarried with or without children, etc.

FHA loan applicants, when they experience such discrimination, have a great amount of power to stop it and set an example for others to follow. But the key is to report the discrimination when it occurs rather than letting it go. You can file a Housing Discrimination Complaint Form or contact the FHA directly for advice and assistance by calling 1-800-CALL FHA.

Do you have questions about FHA home loans or FHA refinance loans? Ask us in the comments section.

FHA Refinancing Loans: No Cash Out With An Appraisal

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The FHA refinance loan options you have to choose from can include cash-out and no cash out refinance. The FHA has different rules for these types of refinancing; what are the basics of the FHA No Cash Out With Appraisal refinance loans?

Maximum Mortgage Loan Amount

The maximum you can borrower on a no cash out refinance loan with an appraisal is either:

97.75% Loan-To-Value (LTV) factor applied to the appraised value of the property, or the amount of the existing debt. Whichever amount is lowest between these two will be used to calculate the FHA refinance loan amount.

Loan Amounts and UFMIP

FHA loan rules state, “The total FHA first mortgage is limited to 100% of the appraised value, including any financed upfront mortgage insurance premium (UFMIP)…Generally, the maximum mortgage may never exceed the statutory limit, except by the amount of any new UFMIP. However, the maximum mortgage may exceed the statutory limit on certain specialty products. Note: The borrower must comply with any appraisal requirements, including repairs, before the mortgage is eligible for insurance endorsement.”

Subordinate Liens
The FHA loan rules as presented in HUD 4155.1 Chapter Three say that a subordinate lien (including Home Equity Lines of Credit or HELOC for short) can “remain outstanding” but must be subordinate to the FHA loan. This is true when, according to Chapter Three:

  • FHA insured mortgage meets the eligibility criteria for mortgages with secondary financing outlined in HUD 4155.1 5.C, and
  • combined amount of the FHA-insured mortgage and the entire subordinate lien does not exceed the applicable FHA LTV ratios.
  • The lender must use the maximum accessible credit limit of the existing subordinate lien to calculate the Combined Loan-to-Value (CLTV) ratio

Refinancing As A “Buy Out”

Do FHA refinance loans allow the borrower to buy out a spouse or co-borrower? According to HUD 4155.1 Chapter Three, “When the purpose of the new loan is to refinance an existing mortgage in order to buy out an ex-spouse’s or other coborrower’s equity, the specified equity to be paid is considered property-related indebtedness, and eligible to be included in the new mortgage calculation. The divorce decree, settlement agreement, or other bona fide equity agreement must be provided to document the equity awarded to the ex-spouse or coborrower.”

For more information on this issue or related matters, contact the FHA directly at 1-800 CALL FHA.

Do you have questions about FHA home loans or refinance loans? Ask us in the comments section.

FHA Loan Reader Questions: First Time Home Buyers and Down Payments

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A reader asks, “Is it true the first time buyer with an FHA Loan can purchase the home with no money down?”

The FHA loan program is similar in some ways to another government-backed loan program–VA loans. VA guaranteed loans are for eligible veterans and feature a no-down payment option unique to that program. FHA home loans, which are also government guaranteed mortgage loans issued by a private lender, do not feature a no downpayment option.

According to FHA home loan rules as described in Chapter Two of HUD 4155.1, says the following about down payments on FHA loans in a section titled Maximum Mortgage Amount For A Purchase:

“The maximum mortgage amount that FHA will insure on a purchase is calculated by multiplying the appropriate loan-to-value (LTV) factor by the lesser of the property’s sales price, subject to certain required adjustments, or appraised value. In order for FHA to insure this maximum loan amount, the borrower must make a required investment of at least 3.5% of the lesser of the appraised value or the sales price of the property.”

It’s important to note that the rule does not make a distinction between a first-time home buyer and any other type of FHA loan applicant. All borrowers who apply for FHA home loans will be required to make the required minimum down payment on their mortgage loan.

Additionally, FHA loan rules make a distinction between the down payment and closing costs–a borrower should not expect that his or her closing costs will be considered part of the down payment amount–these charges (including discount points, appraisal fees and other costs) are completely separate from the down payment requirement.

Do you have questions about FHA home loans? Ask us in the comments section.

FHA Loan Reader Questions: Multiple FHA Loans

FHA HOME LOAN QUESTION

A reader asks, “I was told that I could apply for a second FHA loan if my family outgrew the first house. We have a 980 sqft home–2 bedroom 1 bath that was purchased when my wife and I had only one child. Now we are 4 and need a bigger home. I applied for the second FHA loan and was told last minute that I needed to sell the first home, or lower the balance down to 70% of balance. I hear different things from different banks and want to see if FHA can help me out on this.”

According to the FHA, “To prevent circumvention of the restrictions on making FHA-insured mortgages to investors, FHA generally will not insure more than one principal residence mortgage for any borrower. FHA will not insure a mortgage if it is determined that the transaction was designed to use FHA mortgage insurance as a vehicle for obtaining investment properties, even if the property to be insured will be the only one owned using FHA mortgage insurance.”

Additionally the FHA official site states, “Any person individually or jointly owning a home covered by an FHA- insured mortgage in which ownership is maintained may not purchase another principal residence with FHA insurance, except in certain situations as described in HUD 4155.1 4.B.2.d.”

The scenario in the reader questions is specifically addressed in the FHA loan rules as stated in HUD 4155.1 Chapter Four Section B, which states:

“A borrower may be eligible for another home with an FHA-insured mortgage if the number of his/her legal dependents increases to the point that the present house no longer meets the family’s needs. The borrower must provide satisfactory evidence

  • of the increase in dependents and the property’s failure to meet family needs, and
  • that the Loan-To-Value (LTV) ratio equals 75% or less, based on the outstanding mortgage balance and a current appraisal. If not, the borrower must pay the loan down to 75% LTV or less. Note: A current residential appraisal must be used to determine LTV compliance. Tax assessments and market analyses by real estate brokers are not acceptable proof of LTV compliance.

For more information on these rules, contact the FHA directly by calling 1-800 CALL FHA.

Do you have questions about FHA home loans? Ask us in the comments section.

FHA Loan Reader Questions: How Do FHA Loans Differ From Credit Union Mortgages?

FHA loan questions

A reader asks, “What is the difference between an FHA loan and a loan from a credit union?”

FHA loans differ from other types of loans for many reasons. Conventional mortgages, for example, often require much higher down payments and credit score requirements for conventional lenders. When it comes to credit unions, there may be many differences or similarities depending on which lender you’ve compared the FHA terms and conditions with.

It’s not possible to say across the board how FHA loans may vary–credit unions are all different–but a quick look at some terms and conditions of individual credit unions can be revealing.

For example, some credit unions we looked at offered qualified first time home buyers conventional loans with low down payments but did not offer at or near 100% LTV, unlike many FHA loan products for single-family homes. FHA loans are offered at 96.5% LTV and require a 3.5% minimum down payment, Credit union mortgage loan down payment rules will vary from lender to lender. Some credit unions  offered conventional loans at 80% LTV, while others offered conventional loans at at 95% LTV.

What’s the major difference between an FHA guaranteed loan and a home loan issued by a credit union? In general terms, the program structure. Credit unions are described by some as “member owned” financial cooperatives. The FHA loan program is a government program that guarantees loans made by FHA-approved private lenders. The legal guidelines for FHA mortgages are consistent and do not vary in terms of program’s rules–some fees, interest rates and credit score requirements DO vary from lender to lender.

Basic FHA loan requirements include the following as found on FHA.gov:

  • The borrower must meet standard FHA credit qualifications.
  • The borrower is eligible for approximately 96.5% financing. The borrower is able to finance the upfront mortgage insurance premium into the mortgage. The borrower will also be responsible for paying an annual premium.
  • Eligible properties are one-to-four unit structures.

FHA guaranteed mortgages are insured by the government, there is a built-in system of recourse and help for borrowers experiencing difficulties with their mortgages. There are FHA-approved housing counseling centers across the nation to help borrowers or soon-to-be borrowers work out financial issues, credit questions and other relevant issues. The credit union may or may not be a local entity–some may be nationwide, others may not. The FHA loan program is national, and government-backed.

The most important thing a borrower can do is make an informed decision about their home loan. Compare FHA loan terms and conditions with those of the credit union you’re thinking of and see how they both stack up. You may find FHA mortgages work in your favor in many areas.

Do you have questions about FHA home loans? Ask us in the comments section.

FHA Single-Family Home Loans: For Personal Use Only

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One topic we’ve covered recently in blog posts and in our answers to reader questions concerns the permitted uses for single-family FHA home loans. Read what the FHA official site says about FHA policy (in general) on multiple FHA home loans for a single borrower:

“To prevent circumvention of the restrictions on FHA-insured mortgages to investors, FHA generally will not insure more than one mortgage for any borrower (transactions in which an existing FHA mortgage is paid off and another FHA mortgage is acquired are acceptable).”

FHA home loans for single-family properties also have a rule stating the borrower must occupy the property as the primary residence once the sale is complete. That is another rule designed to reinforce the “no investors” policy on these types of loans.

Some borrowers wonder if these rules are actually enforced, or if they are written but rarely invoked. To clear up this question once and for all, read what the FHA loan rulebook, HUD 4155.1 Chapter One says about the lender’s responsibility when processing an FHA single-family home loan application. This information is found under the section titled, “Verifying a Borrower’s Financial Position” and includes the following:

“The lender must

• verify the borrower’s identity, and
• ask sufficient questions of the borrower to get a complete picture of the
− borrower’s financial position
− source of funds for the mortgage transaction, and
− intended use of the property.

(Emphasis ours.)

The reading of this rule makes it quite clear–the FHA takes the “no investors” rule very seriously and charges the lender with ascertaining whether the borrower will comply with these guidelines.

Another portion of the FHA loan rulebook stresses that a home cannot be purchased with an FHA guaranteed mortgage if, “FHA concludes that the transaction was designed to use FHA mortgage insurance as a vehicle for obtaining investment properties, even if the property to be encumbered will be the only one owned using FHA mortgage insurance.”

FHA Loan Credit Requirements: A Reader Question

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A reader asks, “My wife’s uncle just passed away not to long ago and I want to keep his property in the family. I make very good money,but i only have a 590 credit score.How can I go about buying his property and keeping everything the way it always has been?”

Without addressing the credit score issue, in general one good way to go about buying a home with an FHA home loan is to get pre-approved for a loan amount–fill out the online application at FHALoan.com (a private company, not a government agency) and work with the loan officer to get the property appraised. This process–pre-approval, appraisal, and etc.–is fairly typical for many borrowers.

Credit scores are a separate issue. The FHA Loan program has minimum credit score requirements which include the following:

At or above 580:
eligible for maximum financing.

Between 500 and 579
limited to a maximum LTV of 90%.

Less than 500
not eligible for FHA-insured financing.

Those numbers are printed directly from the FHA loan rulebook, HUD 4155.1. But it’s important to know that these numbers are only FHA minimums. The lender is free-and usually does–require higher credit scores for FHA home loans. The FHA will not force a lender to issue an FHA mortgage to a borrower with what it views as bare-minimum credit according to its own standards.

Many lenders won’t consider an application if the borrower has a combined FICO score of 620 or less, but the important thing for all potential FHA loan applicants to consider here is actively working on credit scores (without resorting to third party “credit repair” agencies which may not be able to do anything on your behalf you can’t do yourself for free).

If you need help with credit score issues, contact the FHA at 1-800 CALL FHA and ask for a referral to an FHA approved local home buyer counseling agency that can help. These agencies can advise you on working on improving your credit score, preparing for an FHA home loan, and budgeting for the FHA loan expenses you’ll need to pay in order to close the deal.

Do you have questions about FHA home loans? Ask us in the comments section.

U.S. Bank Settles Discrimination Claim

FHA DISCRIMINATION SETTLEMENT
A press release on the FHA/HUD official site announces a settlement in a disability discrimination claim brought by HUD against U.S. Bank. According to HUDNo.13-008, “Minnesota-based U.S. Bank National Association will pay $12,000 to a loan applicant with disabilities under a Conciliation Agreement settling allegations that the bank required him to provide unnecessary documentation to establish he would continue receiving disability income for three years before they would approve his mortgage loan.”

As the press release states, the Fair Housing Act makes it an offense to discriminate “in the terms and conditions of a loan based on a person’s disability, including by imposing different loan application or qualification criteria.” According to the press release, a complaint was filed with HUD after U.S. Bank required a borrower to show proof that his disability payments would continue for three years. According to the press release, “Additional documentation was not needed because Social Security award letters without expiration dates establish continuity of income” for the require threed years.

“Holding persons with disabilities to a different standard because they rely on disability-related income violates the Fair Housing Act,” said John Trasviña, HUD Assistant Secretary for Fair Housing and Equal Opportunity. “Reasonable income standards are a necessary part of the underwriting process but HUD will continue to take action when these practices are discriminatory.”

What is the result of the settlement? According to HUD, U.S. Bank agreed to pay the applicant  “$12,000, accept SSI award letters as establishing at least three years’ income, and refrain from requiring applicants receiving disability income to provide doctors’ statements concerning the nature, severity, or duration of a disability.”

We report these cases here because any time an FHA, VA or conventional borrower experiences such discrimination, they are often the only ones who can–by filing a formal complaint with the FHA/HUD–get recourse and prevent further abuses from happening. Any borrower who feels they have experienced such discrimination in the home loan process should call 1-800 669 9777.